Second Life is a hot place to try out new business ideas.

With a growing commercial real estate business, you are meeting with your people around a huge mahogany table to discuss a proposed art gallery. Everyone looks fairly human, but someone is wearing a fox suit, and there's a guy who looks like one of those colonial marines from Aliens. You can learn a lot about everyone this way--by seeing whom they have chosen to become with a few mouse clicks. You ask whether a particular piece of property has yet been developed, and the person next to you vanishes into thin air and reappears 60 seconds later with a report; he has just gone "there". Through the windows you can see a gigantic blimp cruising by, trying to steal your employees with video ads of job offers. It can't come into your office, but it can hover at the edge. A model of the gallery floats in the center of the table for everyone to inspect.

You are the only one in the group who lives in the U.S. Your most trusted partner is someone you've never met face-to-face: a 20-year-old woman from Portugal. There is more laughing and fun than in a normal meeting, and bad ideas don't live as long. The room is paneled with live screens showing every detail of the business and painfully accurate readouts of how everyone is doing with different aspects of the project. You have known them only a few months and probably won't work together longer than another six, but you will have learned more about collaboration, communication and culture than you would in a half-dozen years in New York.

This isn't the Matrix, but it's in the same neighborhood. This virtual world, where 3-D software and broadband networking let you download a small application that transports you to the surface of a new planet, is a digital re-creation of reality, where everything you see, like the Web, is owned and created by hundreds of thousands of people from around the world. But unlike the Web, this is a living space filled with other real people behaving much as they do in the real world. In other words, it's a lot more than a videogame. It's a place where real companies and real entrepreneurs can try out new product designs, hold press conferences and get feedback from customers. You can go on to Second Life and test-drive a Toyota
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In the world of Second Life, a rich network connects innovators and their ideas to help each other create better products. Here, a Los Angeles toymaker prototypes new toys; a violinist from London becomes a successful virtual architect; an entrepreneur sets up a business to create real-world 3-D replicas of your avatar (or onscreen alter ego) to sit on your desk; and a Brooklyn supermarket manager quits his job to design virtual clothing full-time using the name Crucial Armitage. Second Life has become a sort of singles bar for entrepreneurs--an inexpensive place to test your ideas and show your results to other like-minded people.

How do you join? Go to the site, register with your avatar and go to an orientation island to meet other new members and find out how to navigate, dress yourself and buy and sell virtual goods and services. You can buy an island and set up a golf course, movie theater, hotel, summer camp--to have fun or make real money.

There's a virtual economy underlying this phantom world. To buy and sell things, you first acquire Linden dollars on the Lindex, a currency exchange market: Hand in a real U.S. dollar (via PayPal or a credit card) and you get 266 Linden dollars. That's a free-market price determined by supply and demand, just as in the real-world market for yen and euros.

What would L$266 buy? A couture outfit, a car, a pair of boots, a sofa or a small house. A 16-acre island costs $1,695 of real money; from there you can promote real goods and services.

Every object in Second Life starts with a cube--a.k.a. a "primitive," or "prim"--that you can stretch or bend into any shape; we provide the 3-D modeling tools. If you create a pen, say, you can choose to copy it for sale. Your buyer's Linden dollars go into your virtual account. To pull real dollars out of Second Life, you can sell them on the Lindex. Over the last year the number of people receiving money for goods and services from others in Second Life has jumped sevenfold to 209,000. Recently the total (virtual) money supply was L$1.9 billion.

The real-world San Francisco firm that developed SL, Linden Lab, gets its real dollars in three ways: selling virtual real estate (islands, plots of land, a city block, for example); monthly fees, which range from $10 to $295, to "maintain" a piece of property; and a small fee on currency exchange transactions. Participants who merely visit without owning property pay nothing.

The world inside the host computers is an ideal environment for entrepreneurs, who can expect low barriers to market entry, few natural monopolies and an ability to rapidly develop new ideas that can turn into real products and services. American Apparel, for example, opened a store that let members' avatars try out clothes--and, via a link, to buy them in real life.

Transparency and reuse of content make Second Life more hospitable to innovation than real life. It is very easy to see how your neighbor's business is doing and to share product ideas. Many interactive objects in Second Life (for example, a wristwatch with moving hands that tells the correct time) are built on small chunks of scripted code that can easily be passed among builders. For just about every interesting type of interactive content, there is someone hosting a "sandbox" with free examples that innovators can work from. Second Life is being built not just by the dozens of programmers employed by Linden but also by the thousands of computer-skilled participants who have contributed bits of code.

Flying machines in Second Life illustrate the point. In early 2004 Linden released a set of programming interfaces that would allow users to take any object you were sitting on and turn it into a "vehicle." It could move over the ground or through the air while realistically responding to mouse or keyboard controls. We released two very primitive vehicles--a motorcycle and a flying surfboard--that were freely transferable between users and contained programming code (in the Linden scripting language, which is comparable to C++) that everyone could examine. It was very easy to pop the hood and start making changes, modifying the hoverboard, say, to fly like an airplane. That's just what was done by an intrepid software writer working under the screen name Huns Valen. He created a Flying 1.0 program that modified our original examples to allow nice airplanes to be made--and gave it away.

Three years later thousands of derivations of those original programs exist. There are vertical takeoff and landing aircraft with heads-up displays--think of those simulations on fighter-jet screens--and rocket launchers. You can buy a glider or fly a dragon with wings. Although the physics simulation currently in Second Life isn't accurate enough to help design real airplanes, it's easy to imagine how this might be possible in the near future.

Information about how to modify and create ever more sophisticated machines spreads quickly in Second Life. For every clever new idea, at least one designer is willing to serve up his code for the fun of being remembered as the guy who seeded the design community. For example, within weeks of our introducing heads-up display technology a designer screen-named Yadni Monde started giving away an editable "emote" heads-up display that lets your avatar change facial expressions. Such altruism can pay off: You might parlay a giveaway into a great programming job.

Second Life competes in many ways with the real world, offering better ways to collaborate, meet people and build things. In the past few months 4,000 IBMers have flooded into Second Life to brainstorm, hold meetings for workers dispersed around the globe and prototype new shopping experiences for customers. Starwood Hotels
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Philip Rosedale is the founder and chief executive of Linden Lab, which produces Second Life.